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Title: The Role of Special Education in School Choice
Author: Julie Berry Cullen, Steven G. Rivkin
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This PDF is a selection from a published volume from the
National Bureau of Economic Research
Volume Title: The Economics of School Choice
Volume Author/Editor: Caroline M. Hoxby, editor
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-35533-0
Volume URL:
Conference Date: February 22-24, 2001
Publication Date: January 2003
Title: The Role of Special Education in School Choice
Author: Julie Berry Cullen, Steven G. Rivkin
The Role of Special Education
in School Choice
Julie Berry Cullen and Steven G. Rivkin
3.1 Introduction
There are differing views of the impact of school choice programs on the
distribution of student opportunity. Proponents claim that all students,
both those who take advantage of choice and those who remain in their
neighborhood schools, will benefit as schools improve in response to com-
petitive pressures. Others fear that only the more advantaged and informed
students will opt out to better schools, leaving the more disadvantaged stu-
dents isolated in the worst schools with declining resources.
Among the students who may be left behind are special needs students.
Students with disabilities are more costly to educate and may therefore en-
counter explicit or implicit barriers to attending choice schools. Also, high
concentrations of special needs students may be a deterrent to other stu-
dents deciding on schooling options. These considerations may lead some
schools to adopt policies that discourage students with special needs from
attending, thereby limiting the choices available to these students. Such
concerns about the relative access and participation of students with dis-
abilities overlap with concerns about low-income and minority students, al-
though the degree of legal protection differs.
Julie Berry Cullen is assistant professor of economics at the University of Michigan and a
faculty research fellow of the National Bureau of Economic Research. Steven G. Rivkin is pro-
fessor of economics at Amherst College and a research associate of the National Bureau of
Economic Research.
The authors would like to thank Caroline Hoxby, David Monk, Richard Murnane, Ben
Scafidi, and participants in the NBER Economics of School Choice Conference for helpful
comments and suggestions. The authors would also like to thank John Easton of the Consor-
tium on Chicago School Research and the Chicago School Board for providing access to the
Chicago Public Schools data and Brian Jacob for processing the data.
68 Julie Berry Cullen and Steven G. Rivkin
Since 1975, disabled students have been guaranteed a free and appropri-
ate public education (FAPE) by the passage of the Education for all Hand-
icapped Children Act (EHA) and its successor, the Individuals with Dis-
abilities Education Act (IDEA). Prior to the passage of the legislation, a
congressional investigation revealed that a majority of disabled students re-
ceived inadequate educational services and at least one-third of severely dis-
abled students were excluded altogether from public schools (Verstegen
1994). Now, nearly one in every eight students is classified as disabled and
one in every five new dollars of per-pupil spending is dedicated to special
education (Hanushek and Rivkin 1997). The costs associated with educat-
ing the typical disabled student are approximately 2.3 times those for
nondisabled students, and this ratio can be as high as 30 for the most se-
verely disabled (Moore et al. 1988; Chambers 1998). In order to support lo-
calities in providing the mandated services, the federal government and
states provide on average 8 percent and 56 percent of the funding, respec-
This chapter considers the impact of expanded school choice on the qual-
ity of special education services, on the size and composition of the special
education sector, and on the distribution of students with disabilities
among schools and districts. The crucial role played by the structure of spe-
cial education funding in the determination of each of these outcomes is
highlighted throughout the chapter. The tensions inherent in the develop-
ment of a finance system that encourages schools to provide special services
where appropriate but not to classify students as disabled inappropriately in
order to procure additional resources will persist regardless. However, ex-
panding schooling choices has the potential to mitigate these tensions
through competitive discipline or to exacerbate them through increased
Recognizing that special education is essentially a social insurance pro-
gram helps to clarify the source of the trade-offs between adequacy and in-
centives. The economic justification for the entitlement to special education
is that it provides insurance for families who have a child who turns out to
be expensive to educate. Similarly, the justification for federal and state
funding to support special education programs is to insure local schools
against the high costs of serving student populations that happen to have a
high rate of disability.
Just as Medicare and Medicaid may distort the behavior of patients and
health care providers, the insurance provided through special education
may distort the behavior of parents and educators. The higher the quality
of special education relative to regular education, the more likely that par-
ents will aggressively seek to gain admittance to special education, so that
program generosity and size will be positively correlated. From the per-
spective of schools as agents, how well the amount of additional federal and
The Role of Special Education in School Choice 69
state revenue matches the marginal costs of serving disabled students will
determine whether schools have incentives to under- or overclassify stu-
dents as disabled and to offer too few or too many additional services.1
In addition to the potentially perverse incentives for both parents and
schools, there may also be adverse selection. Parents with disabled children
may seek out schools that provide more generous services. If special educa-
tion is not fully funded and these choices reduce resources dedicated to
other instructional programs, regular education students may flee to other
schools that provide fewer services for disabled students. The danger of at-
tracting high-cost students and repelling less expensive nondisabled stu-
dents can discourage the provision of high-quality services. In an attempt
to balance the potential for overclassification and adverse selection against
the desire and legal mandate to provide appropriate services for children
classified as disabled, state school finance policies have oscillated between
case mix systems that reimburse schools and districts based on the actual
number and mix of students with disabilities and prospective payment sys-
tems in which the amount of funding is decoupled from the actual number
and type of disabilities.
The ramifications of expanded school choice in this context will depend
upon the structure of school finance and the interpretation of the legal man-
date to provide special services. If special needs students are "priced" to
cover the total costs of service provision, then increased choice can improve
the quality and perhaps the efficiency of special education programs as
schools compete for special needs students. If instead they are underpriced,
fewer schools may open or participate in any choice program, and schools
that do participate may attempt to discourage matriculation of high-cost
students, perhaps by providing low-quality programs. This would reduce
the gains from competition for students with disabilities, particularly if not
all schools are required to provide special education services. Because
private schools are currently exempt from federal requirements for students
with disabilities and the treatment of charter schools is evolving over time,
legal interpretations will play an important role in determining how dis-
abled students fare under nontraditional forms of choice.
The next section describes the issues related to financing the special edu-
cation component of a school choice program, incorporating existing evi-
dence from traditional public schooling. Section 3.3 then presents and in-
terprets new evidence on the stratification of special needs students across
and within public school districts in Texas. The subsequent three sections
review the relevant evidence and the unique considerations that arise for
1. Given the ambiguity in determining disability and needed services in many cases as well
as the potential for high costs, special education has become the most litigated area in educa-
tion (Katsiyannis and Maag 1998).
70 Julie Berry Cullen and Steven G. Rivkin
special education under open enrollment, charter schools, and vouchers, re-
spectively. In the section on open enrollment, we provide new evidence from
the Chicago public schools. Sections 3.3 through 3.6 demonstrate that vari-
ations in the impact of different forms of public- and private-sector choice
are likely to be heavily moderated by the generosity of the reimbursement
system. The final section summarizes and discusses the most salient policy
3.2 Financing Special Education under School Choice
There are two features of school choice programs that will most directly
determine the impact on special education students and programs. The
first, and the focus of this section, is how closely the reimbursement for serv-
ing disabled students reflects marginal costs. The second is whether or not
choice schools are required to serve applicants with special needs. The pay-
ment structure will be particularly important for inducing competition
when institutions exist that have no legal responsibility to serve disabled
students. We first consider these issues in a world in which disability status
is given and not affected by family or school behavior, and we then incor-
porate the complexities introduced by the participation of families and
schools in the special education classification process.
3.2.1 Exogenous Disability Status (Innate)
We begin by considering how special education affects the choices of par-
ents and schools when a student's disability status is innate. In this case, stu-
dent disability is much like any other identifiable characteristic that is cor-
related with higher educational costs, such as economic disadvantage, and
a guiding principle for school finance is to provide enough revenue to insure
adequate service provision and access to schooling opportunities. When we
incorporate the fact that the classification of students is responsive to fiscal
incentives, this imposes the additional requirement that the system be de-
signed to discourage gaming.
Parents are assumed to recognize the multidimensional nature of schools
when making housing and schooling choices. For our purposes, the rele-
vant dimensions of schools are regular and special education quality. Both
regular and special education quality will be a function of the level of re-
sources, the quality of instruction, and peer characteristics. Parents of spe-
cial needs children undoubtedly place much greater weight on the quality
of special services than do other parents, although most special education
children spend much of the day in regular classrooms. How parents and stu-
dents perceive special education quality will depend on the types of settings
in which special needs students are served. More intensive resources may
not be highly valued if those resources are accompanied by more isolated
The Role of Special Education in School Choice 71
placements and reduced contact with nondisabled students.2 There is very
little consensus about what types of interventions are effective for special
needs students, so that parent preferences and beliefs about what is effective
will play a particularly important role.
The quality of regular education programs is tied to special education
through two channels: the budget and classroom dynamics. Depending on
the reimbursement rate, the marginal cost of serving disabled students might
either exceed, match, or fall short of the additional revenue generated. In the
case of traditional public schools, the net local financial burden will lead to
some combination of reduced spending on other educational programs and
increased taxes. Lankford and Wyckoff (1996) and Cullen (1997) find evi-
dence of nearly one-for-one crowdout of spending on other programs by lo-
cal excess special education costs in New York and Texas, respectively. For
schools that are financed purely based on student enrollment, such as char-
ter schools, such one-for-one crowdout is mechanical. Special education
may also enhance or detract from the regular education classroom by affect-
ing the distribution of abilities and behaviors. In cases in which students are
mainstreamed, there may be negative spillovers through peer effects or pos-
itive spillovers through increased resource intensity in regular classes.3
For expanded school choice to improve school quality for disabled stu-
dents, schools must compete to serve these students. To foster this kind of
competition, reimbursement rates should reflect the expected effective net
resource and peer costs of serving students with differing disabilities. This
form of case-mix reimbursement would ensure that all special needs stu-
dents have access to a variety of schooling options, that regular education
students do not have an incentive to avoid special needs students, and that
schools have an incentive to control costs. Importantly, appropriate reim-
bursement based solely on the more easily measured financial costs would
leave peer group composition as the only factor discouraging the provision
of special education.
One complication that arises in determining the appropriate reimburse-
ment rate in this setting is economies of scale in the provision of services to
severely disabled students. In order to minimize costs, the reimbursement
rate could incorporate average fixed per capita costs at the efficient size.
However, this would lead to the concentration of severely disabled students
2. IDEA explicitly includes the requirement that schools serve students in the most inte-
grated environment possible. Although inclusion has been a long-standing goal of disability
rights activists, there is little evidence about the relative benefits of serving disabled students in
more and less restrictive environments. Hanushek, Kain, and Rivkin (forthcoming) do not find
significant differences in achievement gains by type of setting in Texas public schools.
3. Evidence on the effect of special education programs on regular education quality is
mixed. Whereas Cullen (1997) finds that resource crowding-out harms the quality of regular
education, Hanushek, Kain, and Rivkin (forthcoming) find that an increase in the share of stu-
dents classified as disabled is positively related to the quality of regular education.

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